The Consumer Financial Protection Bureau (CFPB) has filed its first civil enforcement suit since its creation a little over a year ago. A California federal district court has issued a temporary restraining order and asset freeze against the Gordon Law Firm, its main partner, and several affiliates for allegedly conducting a mortgage relief scheme since early 2010 that targeted financially distressed homeowners. The CFPB is also seeking a permanent injunction, restitution, and other monetary damages. (CFPB v. Gordon, No. 2:12-cv-06147-RSWL-MRW (C.D. Cal. July 18, 2012).)
The CFPB alleges that the defendants violated the Consumer Financial Protection Act of 2010 (CFPA) (12 U.S.C. §5491 et seq.) by promising to reduce mortgage payments and interest rates in exchange for an advance fee of $2,500 to $4,500, but never taking any action to modify the loans. The CFPA prohibits parties from engaging in deceptive acts or practices.
The complaint also alleges the defendants violated Regulation O, a combination of various federal statutes, including the former Mortgage Assistance Relief Services Rule (MARS) (12 C.F.R. Part 1015). This requires mortgage relief providers to disclose certain information, while also prohibiting them from making certain representations and from collecting a fee until the consumer has executed a written agreement with the lender or mortgage servicers that incorporates the loan modification.
Under a program called the Pre-Litigation Monetary Claims Program, the defendants allegedly required homeowners to sign documents agreeing to pay an advance fee for a forensic audit of their mortgage lenders to determine whether the lenders were engaged in illegal conduct. At the same time, the defendants allegedly would inform these consumers that the payment was required to process the loan modification paperwork with the lender. The complaint also claims that the loan modification services were marketed under the guise of being “pro-bono” services.
This structure was “designed to avoid the mandates of laws such as MARS and Regulation O that prohibit advance fees and deception by mortgage relief operations like those run by defendants,” the complaint said.
As part of the scheme, the CFPB also claims that the defendants advertised the service nationally via online marketing, direct mail, and cold calling. In their mail solicitations and phone sales pitches, the defendants allegedly misrepresented that they were affiliated with government entities, such as the Department of Housing and Urban Development, and claimed they were sponsored by government grants.
“To see them go after lawyers in one of their [CFPB] first actions rather than going against a mortgage servicing company was surprising, but refreshing,” said Allen Wilkinson of Laguna Woods, Calif., a plaintiff attorney. “It’s a good thing to send a signal out to smaller entities that you cannot be ripping these people off. But I would prefer to see them go after the biggest lenders and violators because they are taking advantage of a greater number of people than the smaller entities.”
The CFPB’s first public enforcement action, which preceded the law firm suit, was against Capital One Bank over deceptive marketing practices. Capital One agreed to pay a total fine of about $210 million, which includes between $140 and $150 million in restitution to two million customers and $60 million in penalties to the CFPB and the Office of the Comptroller of the Currency for violating the CFPA. Capital One’s third-party vendors had allegedly led the customers to believe that purchasing services and products ancillary to the company’s credit cards, such as payment protection, identify theft protection, and access to credit education specialists, was a requirement for credit card activation or that these were free services. On August 17, a group of Capital One’s shareholders filed a derivative action in Virginia state court against current and former directors, alleging breach of loyalty, gross mismanagement, corporate waste, and unjust enrichment as a result of the fraud settlement.
To further combat abusive practices against consumers, last month the CFPB also proposed new federal regulations for the mortgage servicing industry. The regulations would implement a number of requirements on mortgage servicers, including providing homeowners with better information about changes to interest rates and options for avoiding foreclosure, as well as imposing additional requirements if loan modifications are being conducted. The public comment period for the proposed regulations ends on October 9, and the CFPB has stated it hopes to issue final rules in January 2013.